Default clause on management control
The ongoing intracorporate dispute among members of the third generation of the Lopez clan has given the public an insight on corporate maneuvers to maintain managerial control.
At the center of the conflict, among others, is the sale by First Gen Corp., a producer of clean and renewable energy owned by the Lopez family, of majority control to Prime Infrastructure Capital Inc. for P62 billion.
The contract of sale provides that if First Gen’s chair and CEO Federico “Piki” Lopez or his designees lose management control over the company, Prime Infra shall have the option to buy out First Gen’s remaining shares at a discount.
The other cousins of Piki Lopez had described this provision as a “poison pill” that is meant to prevent him from being removed by the board for whatever reason.
In defense, Piki Lopez said that “change of management control” (CMC) clause was requested by Prime Infra and is a manifestation of its trust and confidence in his managerial expertise.
The CMC clause is a standard provision in financial contracts in the Philippines that involve tons of money, especially if the creditor or investor is a foreign entity.
There is nothing unreasonable or unwholesome about that clause. It is based on common business sense that a creditor or investor would prefer to deal with the same party it negotiated and entered into contract with from beginning to the end.
With a lot of money involved, he or she would not want to take the risk that whoever succeeds the person that he or she closed the deal with would live up to the written (and sometimes unwritten but mutually agreed upon) provisions of the contract.
He or she would be more comfortable doing business with the party whose credentials had earlier been reviewed and found to be sufficient to partner with, than to deal with another of unknown capacity after money has been delivered or committed.
If there are perceived potential threats to the leadership of that party or the reputation for competence of the possible successors is quite dicey, the CMC clause could be a deal breaker.
Depending on the agreement of the parties, if the CMC happens, the event shall constitute an event of default, which would result in, for example, the cancellation of any credit facilities earlier scheduled and the payment of penalties, or, as in the case of the First Gen transaction, give Prime Infra the option to buy out the former’s shares of stocks.
It strains the imagination to think that Prima Infra, which is headed by a businessman whose savvy is undisputed, would have agreed to the purchase of First Gen, shares with the CMC clause in place, without first making sure that its directors were agreeable to it.
It is standard practice in investment contracts that before any funds are released, the investor requires its counterparty to submit closing or drawdown documents that certify, among others, that the latter is compliant with the affirmative and negative covenants of the contract or that no event of default has arisen or may probably arise.
That certification is issued by the corporate secretary (corsec) under oath and, where necessary, it cites board resolutions that would confirm compliance by the company with the significant terms and conditions of the contract.
No corsec worth their salt would issue that certificate unless its contents are correct or accurate at the time of its issuance, more so if the contract involved would have a significant financial impact on the company.
Incidentally, the corsec is appointed by the board so he or she is expected to do his or her job in a manner consistent with the instructions of the directors.
With the CMC clause in place and there appears no credible reason to justify its removal, First Gen has no choice but to live with it and accept its consequences if it kicks in.
In business, a handshake is considered sufficient to consummate a contract. More so, if it is signed, sealed and delivered after lengthy negotiations.
For comments, please send your email to raul.palabrica@inquirer.net.
